All About TDS on Purchase of Goods – Sec. 194Q of Income Tax Act

The Finance Act 2021 has introduced a new section 194Q which is effective from 1 July 2021 to provide for deduction of tax by the buyer from seller on the transaction of purchase of goods. The applicability of section 194Q from the buyer side and section 206C(1H) on the seller side would create a lot of confusion and increase the compliance burden for both the parties.

In the last financial year 2020-21 the Finance Act 2020 was amended and section 206C of the Income-tax Act, 1961 was brought in to widen the income tax base in India. A new sub-section (1H) was inserted for collection of tax at source (TCS) with effect from 1 October 2020. It was introduced to collect TCS @0.1% of the Sale consideration at the time of receipt where sale consideration exceeds Rs.50 Lakhs in any previous year. The TCS was collected by the seller from buyer.

Applicability of Section 194Q

Section 194Q – TDS on Purchase of Goods
This section is applicable to only those buyer’s whose total sales, gross receipts or turnover from the business exceeds Rs. 10 crore during the financial year immediately preceding the financial year in which the purchase of goods has been carried out.

The buyer has been made responsible for paying any sum to any resident seller for purchase of goods to deduct tax at source (TDS) at rate of 0.1% of sales consideration where the value of total transactions entered exceeds Rs. 50 lakh in the previous year.

To summarize the applicability is based on following conditions:-

1. It requires deduction of tax at source by a purchaser of goods whose turnover (exclusive of GST) for FY 2020-21 has crossed Rs. 10 Cr.
2. It is applicable only when the seller is a resident of India. Therefore, import purchases are not covered under this section. Further, the buyer should not be in the list of persons excluded from the provision for deduction of tax.
3. TDS @ 0.1% shall apply only if purchases from a seller exceeds Rs. 50 Lacs during the financial year. Since it has been effective from 01.07.2021 the value of transactions between last quarter 01.04.2021 to 30.06.2021 needs to be considered for evaluating the threshold of Rs.50 Lakhs.
4. If a particular transaction qualifies for deduction of TDS u/s 194-Q, then the same transaction shall not attract TCS u/s 206C(1H).

 

Residential Status of Buyer & Seller for Applicability of Section 194Q

To verify the applicability of Section 194Q of the Income Tax it is important to evaluate the residential status of the buyer and the seller. This provision is applicable on the buyer irrespective of the fact whether the buyer is a resident or non-resident. However, in certain situations as depicted in the table below specific exemptions are available in the act.

Scenario	Residential status of seller	Residential status of buyer	Applicability of TDS/TCS
Purchase/ Sale of Goods Within India	Resident	Resident	In this case, both Section 194Q & Section 206C(1H) are applicable.
Import of Goods from Outside India	Non-resident	Resident	None of these sections are applicable
Export of Goods out of India	Resident	Non-resident	None of these sections are applicable
Merchant Transactions Outside India	Non-resident	Non-resident	None of these sections are applicable

However, in certain transactions of import and export of goods where both the buyer and seller are resident in India both the sections 194Q and 206C(1H) would be applicable subject to other conditions as specified under the act.

 

The primary condition of applicability of section 194Q & 206C(1H) is the turnover of the buyer and seller.

Turnover of seller	Turnover of buyer	Applicable provisions
More than Rs. 10 Crore	Less than Rs. 10 Crore	Section 206C(1H) – TCS to be collected by the seller
Less than Rs. 10 Crore	More than Rs. 10 Crore	Section 194Q – TDS to be deducted by the buyer
More than Rs. 10 Crore	More than Rs. 10 Crore	Both the sections shall be applicable

How to determine the threshold of Rs.50 Lakhs applicability for TDS on Purchase of Goods under Section 194Q

Section 194Q of the Income Tax Act states any person responsible for paying any sum to a resident seller for purchase of any goods of the value exceeding Rs. 50 Lakhs in a previous year shall deduct tax under this section. However, tax is not deductible for any payment or credit made before 1st July, 2021.

Lets understand this in form of an illustration :-

Case	Purchases before 01-07-2021	Purchases on or after 01-07-2021	Amount on which TDS shall apply
A	60 L	20 L	20 L
B	40 L	20 L	10 L
C	90 L	–	–
D	–	70 L	20 L

In Case A since the threshold limit of Rs. 50 Lacs has crossed before 01-07-2021, the provisions shall apply on all transactions effected on or after that date.

The provisions of section 194Q are applicable between distinct Buyer & Seller. If a buyer is purchasing goods from different units/ branches of same seller, the threshold limit of Rs.50 Lakhs, shall be calculated by clubbing all such units / branches as they are under the same PAN number under the Income Tax Act.

 

Interplay between section 194Q and section 206C(1H)

The dual provisions of section 194Q and 206C(1H) under the Income Tax Act have been made applicable on the transactions of ‘Sale of Goods’. To avoid confusion, section 194Q provides for certain exclusions where the tax shall not be deducted under section 194Q under following circumstances:
(i) Where tax is deductible under any other provision of the Act; and
(ii) Where tax is collectible under the provisions of section 206C other than transaction to which section 206C(1H) applies.

It thus stands clarified that in case any TDS or TCS is required to be deducted / collected under any other provision of the Income Tax Act on a particular transaction, such transaction shall not fall within the ambit of section 194Q. However, transactions where both 206C(1H) and 194Q are applicable the provisions of section 194Q shall continue to apply.

However, the burden of compliance has been imposed on the seller to ensure that the TDS was applicable on the transaction and the buyer has deducted the TDS. If the buyer was required to deduct TDS and has not deducted such amount, the provision of section 206C(1H) shall be then applicable.

 

A Comparison – Section 194Q Vs. Section 206C(1H)

Basis of distinction	TDS on purchase of goods [Section 194Q]	TCS on Sale of goods [Section 206C(1H)]
Who is liable for deduction/collection	Buyer is liable to deduct the tax	Seller is liable to collect the tax
Effective From	01-07-2021	01-10-2020
Turnover limit of deductor or collector	The total sales, gross receipts or turnover of the buyer from the business should exceed Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are purchased	The total sales, gross receipts or turnover of the collector from the business should exceed Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are sold
Threshold limit of purchase/sale	If the value of purchase exceeds Rs. 50 lakhs	If the value of sales exceeds Rs. 50 lakhs
Rate of Tax (PAN is furnished)	0.1%	0.1%
Rate of Tax (PAN is NOT furnished)	5%	1%
Amount on which tax to be deducted/collected	On the amount of purchase in excess of Rs. 50 lakhs	On the amount of sale consideration in excess of Rs. 50 lakhs
Time of deduction/collection	At the time of credit or payment, whichever is earlier	At the time of receipt of any sum
Preference to be given	Purchaser is first liable to deduct the tax if the transaction could be subject to both provision	Seller shall be liable to collect the tax only if the purchaser is not liable to deduct the tax or purchaser failed to deduct tax

 

Examples on TDS Deduction U/s 194Q of Income Tax Act

Particulars	Scenario 1	Scenario 2	Scenario 3
Turnover of Seller (In cr.)	12	6	12
Turnover of Buyer (In cr.)	6	12	12
Sale of goods (In cr.)	2	2	2
Sales consideration paid during the year (In cr.)	1	1	1
Who is liable to deduct or collect tax?	Seller	Buyer	Buyer
Rate of Tax	0.1%	0.1%	0.1%
Amount on which tax to be deducted or collected (In Cr.)	0.5	1.5	1.5
Tax to be deducted or collected	5,000	15,000	15,000

Illustrative Guide on Sec. 194-Q and Sec. 206C(1H)

Turnover FY 20-21		Transaction Value		Applying Section	Amount on which 0.1% shall apply
Buyer	Seller	Upto 01-07-2021	On or after 01-07-2021
3 Cr	3 Cr	20 Lacs	60 Lacs	N/A	NIL
3 Cr	3 Cr	60 Lacs	40 Lacs	N/A	NIL
6 Cr	15 Cr	40 Lacs	60 Lacs	206C(1H)	50 Lacs
7 Cr	20 Cr	70 Lacs	30 Lacs	206C(1H)	50 Lacs
15 Cr	7 Cr	30 Lacs	70 Lacs	194-Q	50 Lacs
15 Cr	7 Cr	70 Lacs	30 Lacs	194-Q	30 Lacs
15 Cr	15 Cr	30 Lacs	70 Lacs	194-Q	50 Lacs
20 Cr	20 Cr	70 Lacs	30 Lacs	206C(1H) & 194-Q	20 Lacs & 30 Lacs
20 Cr	20 Cr	70 Lacs	70 Lacs	206C(1H) & 194-Q	20 Lacs & 70 Lacs
20 Cr	20 Cr	30 Lacs	30 Lacs	194-Q	10 Lacs
20 Cr	20 Cr	30 Lacs	NIL	N/A	NIL
20 Cr	20 Cr	NIL	30 Lacs	N/A	NIL
20 Cr	20 Cr	70 Lacs	NIL	206C(1H)	20 Lacs
20 Cr	20 Cr	NIL	70 Lacs	194-Q	20 Lacs

TDS on payment by E-Commerce operator to E Commerce Participants

Section 194-O in the Income Tax Act requires withholding of tax by e-commerce operator, while making payment to e-commerce participants. In case, where both the section 194Q and section 194-O applies, the provisions of section 194-O shall prevail in view that section 194Q specifically exempts transactions that are subject to TDS under any other provision of the act

No TDS on Security Deposit or Loan Advanced by the Buyer

The requirement to deduct TDS under this provision arises if the purchase value exceeds the threshold limit during the previous years. The deduction is to be made at the time of payment or credit for purchase of goods which-ever is earlier. However in circumstances when buyer advances a loan to the seller or provides a security deposit it is not a payment towards the purchase of goods, it shall remain outside the purview of this provision. Hence, there is no requirement to deduct TDS on loan/deposit advanced by the buyer. However, if at any future date, such loan amount is adjusted against purchased value, the liability to deduct TDS shall arise. The tax shall be deducted on the date on which parties agreed to adjust the loan amount against the outstanding liability.

No TDS on Branch Transfers of Same Assessee

Section 194Q of the Income Tax Act is applicable on the buyer, responsible for making payment to the seller for the purchase of goods. Thus, existence of two distinct parties as ‘seller’ and ‘buyer’ is a pre-requisite to construe a transaction as a purchase. The condition of purchase is not fulfilled in the context of branch transfer. Therefore, the provisions of this section shall not apply in the case of branch transfers.

Ambiguity in Provisions which require further clarification from Department.

Tax under section 194Q is required to be deducted by a buyer carrying on business whose total sales, gross receipts or turnover from the business exceeds Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are purchased. There is no clarification whether the purchases should be related with the business only. Thus, if a person is falling within the definition of the buyer, tax is required to be deducted even if such purchase is not connected with the business carried on by him.

Jewellery, being a movable property, is covered within the term goods. There is no specific exclusion under Section 194Q for deduction of TDS on purchase of jewellery. Thus, the tax shall be deductible on purchase of jewellery if other conditions are also fulfilled.

Additionally, allied or out-of-pocket charges recovered from the customers may or may not form part of purchase value. Where these expenses have been reflected in the purchase invoice itself, it should form part of purchase value. If they are charged through a separate invoice, it should not form part of purchase value.

A similar issue has been raised in respect of Section 194J, to which the CBDT vide Circular No. 23/2017, dated 19-7-2017, has clarified that wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source on the amount paid or payable without including such ‘GST on services’ component. However, such clarification was issued in respect of GST on services only. No such clarification has been issued for GST on goods.

However, in respect of Section 206C(1H), the CBDT vide Circular No. 17, dated 29-09-2020, has clarified that since the collection is made with reference to receipt of the amount of sale consideration, no adjustment on account of indirect taxes including GST is required to be made for the collection of tax under this provision. Since deduction under Section 194Q is to be made with reference to the purchase value, applying the same principle it can be concluded that GST shall form part of the purchase value, therefore, the TDS is deductible on the purchase value inclusive of GST.

Checkpoints From Buyer’s Perspective

• List out domestic suppliers with whom transaction value is expected to exceed Rs. 50 Lacs during FY 2021-22.
• Verify whether the buyer have a valid TAN & PAN
• Verify whether the buyer has filed Income Tax Returns for Last 2 Financial Years
• Check applicability of TDS u/s 194-Q with transactions from such domestic suppliers.
• Deduct TDS u/s 194-Q and deposit on or before due date on monthly basis.
• File quarterly TDS return in Form No. 26Q.
• Issue Form No. 16A to deductee-suppliers.

Checkpoints From Seller’s Perspective

• List out domestic customers with whom transaction value is expected to exceed Rs. 50 Lacs during FY 2021-22.
• Verify whether the Customer has a Valid TAN & PAN
• Verify whether the Customer has filed Income Tax Returns for Last 2 Financial Years
• Obtain a Purchase Order or Issue a Payment Advice to customers to clarify TDS, GST & net payments to be affected for each transaction.
• Create a TDS receivable ledger by the name of “TDS u/s 194-Q” to record all deductions that shall be made by customers.
• Reconciliation of balance in the above stated ledger with Form No. 26AS or, Form No. 16A on a periodic basis.

Conclusion

Considering the ongoing pandemic, issues in interpretation and huge compliance burden which has been imposed on the tax payers these provisions should be deferred for few months as for small and medium enterprises it would require a considerable level of infrastructure and change in the current system of accounting.